Global manufacturing business outlook picking up: Ashmore

Jan Dehn, co-head research, Ashmore Investment Management, feels that a deal on fiscal cliff will be reached by January. He is of the view that both the Democrats and the Republicans have too much to lose if they don't find an agreement.      

Also read: Barclays says RBI rate cut unlikely on Dec 18 Below is the edited transcript of his interview to CNBC-TV18.  Q: What's your base case with regard to the US fiscal cliff? Do you see the Senate and the House eventually striking a deal or will they kick the can down the lane?
A: Our base case is that there will be a deal on the fiscal cliff. The deal is likely to happen in January rather than before year end. I think we are in the early phase of negotiation and these are tough negotiations so there may be an agreement by January. I think both the Democrats and the Republicans have too much to lose if they don't find an agreement.     
So we feel a solution to the fiscal cliff. The fiscal cliff solution will involve a loss of fiscal stimulus next year, though relatively modest which will probably cause a detraction of 1 percent from US growth next year which means that we are heading into another year of about 2 percent growth in the United States next year. Q: How are view the situation in Europe. Do you see Greece problem finally taking a backseat after the recent EU deal or can the ongoing buyback program or something else spring a surprise?
A: No, I don't think the buyback in itself is material for the market. It's a part of an arrangement that was entered into between the ECB, the IMF and the national governments in Europe, trying to divvy out the cost of a haircut on officials set to debt in Greece.
The main conclusions which can be drawn from the arrangement that has been reached the Europeans have once again shown, with usual considerable lag and very slow reaction, but have shown yet again that ultimately they are quite pragmatic and are willing to take decisions that are necessary in order to keep the euro zone intact.
This is rather positive and when the earlier statement of head of ECB, Mario Draghi, is added which says that he is willing to do anything to keep the euro zone together. I think we are basically in a situation where the tail risks in Europe are still receding.
Europe is now facing growth problem and the solution rests with the banking system. The banking system in Europe does not work. Banks are essentially turning to central banks for liquidity. It is necessary to re-capitalise European banks on big scale. We essentially need euro tarp. The way forward towards euro tarp is creation of a single credible European banking regulator.
The market should focus on this going forward. Currently, the positions of France and Germany on exactly how this regulator will be put together and what powers will be vested in this regulator are still not squared up with each other. The Germans and the French have quite different positions. So we are in the early phases of negotiating details of a banking regulator. But that is a key to see economic recovery in Europe. The moment the banking system is better recapitalised then we will see more financing for firms, then firms will start hiring and that in turn will support consumption. Q: Yesterday's event in Spain not being able to raise the entire amount and 10 year yields spiking 15 basis points, a significant event. Do you think something like this is possible in the peripheral countries as well particularly if the Spain bailout request continues to elude?
A: Yes. There is definitely a possibility that European bond yields, particularly in the periphery can spike. I will be surprised if during next year we don't see several episodes of spread widening in the periphery.
Both the US and European bonds, both in core and in the periphery are currently trading at yields that are artificially low. Artificially low because central banks in the US and Europe are actively buying sovereign debt. This means, bond prices are elevated significantly above the actual level that is justified by actual level of risk in that country.
In other words, do not mistake low bond yields in periphery or in the core countries for safety. These bonds yields are artificially low because of intervention from central banks. The actual risks in all of these countries are substantially higher than what bonds markets are currently pricing. Q: The other question that's on everyone's mind at this point is China. In fact the rally in Shanghai took everyone by surprise. The Purchasing Managers Index (PMI) data seems to indicate that growth maybe troughing out. Do you share that view that China maybe on a road to recovery or does there still remain a significant risk of it going down again?
A: China is a super interesting country. It has been through a major leadership transition. The complexion of the new leadership is becoming quite clear. It is clear that China is going to continue along the path that they adopted with the 5 year plan that they adopted in January 2011. This is a major structural shift from export-led growth to a more consumption domestic-led growth.
This is an absolutely necessary economic adjustment and one that will ensure that China can sustain ably continue to expand for well beyond the near- term into the medium and long-term. The fact that the leadership contest is now over. The new leadership is in place, it is going to stabilise things, improve investor sentiment in China and we are likely to see Chinese economic growth pick up from where it has been this year.
I don't think we will get back immediately into double digit growth because the process of transitioning from export-led recovery to a more domestic-led growth model requires resources a number of to move from one sector to another what economists sometimes call crossing the dessert. This period takes time. This process sometimes creates some domestic political opposition as interest groups in one area of the economy resists losing their privilege position.
The new leadership will speed up the transition process. I also think that the global manufacturing business cycle is beginning to pick up now, after taking a big hit in 2011 because of the slowdown in Europe. The manufacturing cycle will pick up in China as it is everywhere else and I think that is going to be supportive for Chinese growth going into Q1 of the next year.

Q: What does all this mean for the world of commodities both this shift from investment to consumption China, the improvement in manufacturing both in China and elsewhere?
A: In most commodities, we really are facing quite serious long-term supply constraints. The problems that we are having in banking system and in the heavily indebted countries also means that the ability to take under take large investment projects that require a large capital is curtailed to some extent.
In many sectors, particularly in oil, we have seen that states have greater involvement in production. That tends to reduce the efficiency of production and tends to be negative for supply. Commodity prices are quite elevated even in the current context of very weak global growth.
So, as we head into next year where global growth is going to pick up at the margin, we would imagine emerging markets for example are going to grow around 6 percent from about 5 percent this year. Well, that addition demand for commodities will arrive in the context of continuing supply constraints. And that puts us in a situation where commodities are likely to continue to be very well supported going into the next year. Q: The Indian market in a correction spree right now because of the vote tomorrow in Rajya Sabha. What is your expectation?
A: I think the outlook for India depends quite crucially on the outcome of the votes. If the reform is adopted, that opens up the door for moving to other reforms including Goods and Services Tax (GST), potential further privatisation and that will be very positive for Indian outlook. It is not just a question of adopting some worthwhile fiscal reforms. It is also the impact on business confidence. Business confidence is absolutely critical for companies when they make capex decisions, capex decisions will drive investment and investment will drive growth.